Meet The New ETFs That Are Offering ‘100% Downside Protection’

If 100% downside protection is the norm for banks that are too big to fail on Wall Street, why shouldn’t it be for everyday investors?

This is the question that a number of ETF innovators are apparently asking, as a wave of new ETFs offering ‘100% downside protection’ are getting ready to hit the market, in the push to find the newest ETF fad. 

After all, something has to replace all of the ESG ETFs that have shuttered in the last year.

Calamos Investments has introduced new exchange-traded funds offering partial returns tracking the S&P 500, Nasdaq 100, and Russell 2000, coupled with complete downside protection through derivatives, Bloomberg reported this week.

The inaugural ETF, Calamos S&P 500 Structured Alt Protection ETF, aims to mirror the SPDR S&P 500 ETF Trust’s price returns up to a 9.65% cap.

Full protection requires purchasing the ETF on its launch day, May 1, 2024, and maintaining the investment until April 30, 2025. This ETF, and others soon to be launched, will use call and put options to manage market volatility, though their effectiveness in fully safeguarding against losses is not guaranteed.

Matt Kaufman, head of ETFs at Calamos commented: “With risk-free rates north of 5% today, options-based product issuers are able to deliver meaningful upside participation with 100% capital protection.”

He continued: “For those issuing ‘protective’ products, the cost of hedging by selling an option — or series of options — to offset the premium to buy a protective put becomes cheaper as rates rise.”

Issuers are launching funds that blend equity exposure with downside protection amid fluctuating interest rates, Bloomberg writes. 

For example, the Innovator Equity Defined Protection ETF, launched in July, has amassed $230 million by offering complete downside protection over two years. BlackRock, the top ETF issuer globally, is also proposing similar funds.

Unlike earlier “buffer ETFs” introduced in 2018 that protect against initial losses up to a point (such as the first 10%), these new funds from Calamos offer less upside potential but greater downside security.

Kaufman concluded: “For people as they age, nearing retirement — they can’t afford the significant drawdowns of the market, but they also can’t afford to not be in the market. So this gives them an opportunity.”